I'm wondering if anyone has been able to get this to work. I'm trying
to have subdomain_fu dynamically generate the dynamically associated
with the sub-domain field for the account model.
my development environment is apache2 with passenger. I guess my
question is can this be done dynamically or will I have to manually
create a sub-domain each time a new account is created?

If I understand correctly, this has nothing to do with Rails but
rather your DNS and Apache vhost setup. Just have a wildcard A name
record pointing to the IP address of the site (or a wildcard CNAME
record pointing to the site's tld) and make sure in Apache that
NameVirtualHost isn't used for the site's IP. If this isn't possible,
then of course you can write code to dynamically add the appropriate
vhost to your Apache config (but it's pretty silly given the
complexity of doing this in a reliable and secure fashion).